Stocks are little changed early Tuesday, but trending slightly higher, as yields give some ground and the dollar eases ahead of tomorrow's crucial CPI inflation data. Another hot report could diminish June rate cut hopes, but economic resilience has stocks near all-time highs.
Treasury yields sink, along with dollar, easing pressure on stock market
Light, featureless trading possible today ahead of tomorrow’s CPI data
Investors look ahead to central bank meetings later this week
(Tuesday market open) Investors seeking a progress update on the Federal Reserve’s fight against inflation have one more day to wait. Tomorrow’s March Consumer Price Index (CPI) could provide more clarity, but meanwhile trading is subdued early Tuesday and the major U.S. indexes are barely changed.
On the plus side, Treasury yields and the dollar retreated overnight. Both remain near recent highs and could continue to represent a hill for stocks to climb, especially if tomorrow’s CPI and Thursday’s Producer Price Index (PPI) continue the hot streak from earlier this year. The Fed to some extent indicated seasonal factors might have kept inflation sticky in January and February, but that excuse might not fly much longer.
“This is the test case, because we’re past the point where you can continue to blame seasonals,” said Liz Ann Sonders, chief investment strategist at Schwab, in a CNBC appearance Monday. “If you don’t see a rolling over in inflation, that would be supportive of the Fed staying in pause mode.”
Wall Street’s bullish reaction to last week’s blow-out March jobs report reflects the idea that investors could be getting comfortable with of one, two, or even no rate cuts this year as long as there’s no sign of recession and earnings growth continues. If yields remain in the 4.4% to 4.5% range for the 10-year Treasury note and markets can rally, that might tell you the market remains fixated more on the economy than on interest rate cuts.
All this could have implications going into Wednesday and Thursday’s inflation data. While investors would likely be concerned by hotter-than-expected readings, the market’s reaction to strong economic data lately suggests there may be some wiggle room should inflation exceed estimates.
The market’s on edge not only for inflation data, but also the start of earnings season Friday. Big banks line up to report, and investors might want to watch whether they put aside more money to protect against possible bad debt and how the current rate structure affects their businesses.
Futures based on the SPX rose 0.2% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) climbed 0.3%. Futures based on the Dow Jones Industrial Average® ($DJI) rose 0.07%.
Halving ahead: Bitcoin is back near recent all-time highs ahead of the “halving” event later this month. A halving occurs roughly every four years when the so-called bitcoin “mining reward,” or block award, is cut in half. This can affect availability of bitcoin.
The NFIB Small Business Optimism Index isn’t one that gets a lot of attention on Wall Street, but today’s March report is worth a look for some troubles bubbling beneath the surface of the economy. The index fell to 88.5, the lowest since 2012 and the 27th consecutive month below the 50-year average of 98.
“Owners continue to manage numerous economic headwinds,” said NFIB Chief Economist Bill Dunkelberg. “Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly.”
With CPI and PPI looming, it might be tough for stocks to gain much traction today. Here are analysts’ March CPI expectations, according to Trading Economics:
Core data strip out volatile food and energy prices.
Last Thursday’s sell-off before the jobs report made clear that investors are nervous about any rate-related data, though geopolitical concerns also played a role in that reversal. Another hot core CPI reading following two stronger-than-expected ones to start 2024 might put hopes of a June rate cut on ice, though the market does build in solid chances of a July cut.
Wednesday brings a Bank of Canada meeting and Thursday features a European Central Bank (ECB) meeting. There’s growing sentiment that the ECB might lower rates before the Fed. Investors fully price in a 25-basis point ECB trim in June, followed by two or three more later this year, Reuters reported.
“Investors are likely to deconstruct every word at the meetings this week,” said Michelle Gibley, Schwab’s director of international research.
Back home, today’s calendar includes a $58 billion U.S. 3-year Treasury note auction, followed by a $39 billion 10-year auction tomorrow. Weak demand at either might push Treasuries lower, sending yields up.
With data and earnings light today, geopolitics could potentially have a bigger impact on markets. Last Thursday’s rally reversal came after crude prices catapulted on Middle East tensions, while Treasury yields dipped that day in what might have been a “flight to quality” move as investors embraced potentially less risky assets (though all investments have risk). If there’s incoming news from any of the world’s many hot spots, check the Treasury market’s reaction.
Earnings season kicks off unofficially this Friday with Q1 reports from JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC).
Before that, Delta (DAL) rolls down the runway tomorrow, with margins in focus as industry costs continue to rise even as travel demand grows. Transportation Security Administration (TSA) data showed airline passenger numbers easily exceeding year-ago figures in early April and generally ahead of pre-pandemic 2019 levels for the same dates. Constellation Brands (STZ), distributor of Corona beer and other alcoholic beverages, is expected to report Thursday, along with CarMax (KMX).
Earnings approach with the SPX trading at a historically high 20.5 price-to-earnings (P/E) ratio, meaning earnings will have to be strong to meet the market’s built-in expectations. Companies that come up short could see their stocks punished.
Stocks on the move:
Monday in review:
Maybe everyone was out watching the eclipse because Monday’s session was a yawner. Major indexes ended barely changed, but banking shares performed well, sending the KBW Regional Banking Index (KRX) up 1.5%. Consumer discretionary companies were also strong. Gold continues to trade near record highs, getting a boost from Chinese buying.
Rate-sensitive utilities and real estate performed well on Monday despite rising Treasury yields and declining odds of rate cuts. These two sectors are the worst performers of the year in the SPX, mainly due to rallying yields that typically hurt high-dividend stocks.
Early today, futures traders saw 99% odds the Federal Open Market Committee (FOMC) will keep rates unchanged following its April 30 to May 1 meeting, based on the CME FedWatch Tool. Chances of a quarter-point rate cut following the FOMC meeting in June are seen at around 54%, rising to around 70% for the late-July meeting.
Top of the week: Take a two-minute trip around this week’s market highlights with Jeffrey Kleintop, Schwab’s chief global investment strategist, in Schwab’s Weekly Market Outlook, posted each Monday.
Ideas to mull as you trade or invest
Beyond inflation headlines: Tomorrow morning, eyes could turn to the CPI’s so-called “super-core” reading, or services minus rent. Average super-core growth was 0.7% in January and February, Barron’s noted. Any March pullback in that category might be viewed as an encouraging sign of recent services-driven price growth fading. While last week’s March Institute for Supply Management (ISM) non-manufacturing PMI report showed services prices easing, there’s concern goods inflation might be on the warpath again after a long fade. This is driven in part by supply chain concerns, one of them being attacks on vessels in the Red Sea that caused an 80% drop in the volume of freight passing through that waterway since late November, according to a recent report by trade publication, The Maritime Executive. Roughly 45% of lost traffic now detours around the Cape of Good Hope, lengthening journey time by an average of 30% and adding significant extra costs, the publication reported. “Freight rates, especially, have skyrocketed,” the article noted, and could add up to 0.7% to core goods inflation globally in the first half of 2024.
Investor check: Despite mixed economic data last month, the markets soared and the Schwab Trading Activity Index™ (STAX) increased to 51.65 in March from 47.65 in February. The only index of its kind, the STAX is a proprietary, behavior-based index that analyzes retail investor stock positions and trading activity from Schwab’s millions of client accounts to illuminate what investors were actually doing and how they were positioned in the markets each month. Despite the market highs, however, Schwab clients remain in the moderate range of market exposure as measured by the STAX. They net bought equities in March, but we continue to see that retail investors are engaging in strategic, thoughtful buying. There’s palpable enthusiasm when it comes to names related to technology, for example, but clients also found areas to moderate and trim exposure. The STAX showed money flowing into stocks like Apple (AAPL), Nvidia (NVDA), and Tesla (TSLA), but Disney (DIS) and Coinbase (COIN) were among stocks that came under selling pressure from investors tracked by STAX.
Counting the minutes: Another key element this week is Wednesday’s release of minutes from the last Fed meeting. Policy makers projected three 2024 rate cuts in their dot plot then, and the minutes might help explain the thinking behind that. Since then, several Fed speakers hinted that fewer or even no rate cuts might be appropriate if the economy continues on its current path. Fed Chairman Jerome Powell has sounded more dovish than many other policy makers lately, and one Fed speaker said last week a rate hike might be necessary if inflation doesn’t flag. That’s the first time we’ve heard the “h word” from a Fed speaker in some time and could be a warning that the Fed won’t hesitate to do what it thinks best to fight inflation, even if Wall Street doesn’t like it.
April 10: March CPI and March core CPI, February Wholesale Inventories, FOMC minutes, and expected earnings from Delta (DAL).
April 11: March PPI and March core PPI and expected earnings from CarMax (KMX).
April 12: University of Michigan preliminary April Sentiment, and expected earnings from JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), and Citigroup (C).
April 15: March Retail Sales and expected earnings from Goldman Sachs (GS).
April 16: March Housing Starts and Building Permits and expected earnings from UnitedHealth (UNH), Johnson & Johnson (JNJ), Morgan Stanley (MS), and Bank of America (BAC).
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